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Bonds: Busy economic calendar to set the tone this week

These were the movements in some of the most widely followed 10-year sovereign bond yields at the end of last week:

US: 2.68% (+2bp)

UK: 1.44% (+3bp)

Germany: 0.62% (+2bp)

France: 0.91% (+2bp)

Spain 1.40% (+0bp)

Italy: 1.99% (+4bp)

Portugal: 1.88% (+0bp)

Greece: 3.61% (-5bp)

Japan: 0.08% (+1bp)

Eurozone yields were a few basis points higher at the end of the week. German and French 10-year yields were up by 2bps. Italian and Portuguese 10-year yields rose 4bps, despite a cautious statement from the European Central Bank at its January meeting.

Eurozone growth and inflation data are in focus this week. On Tuesday, the fourth-quarter GDP growth data is expected to remain steady at 0.6% quarter-on-quarter. On Wednesday, the advance data for core inflation could display a slight improvement from 0.9% to 1.0% year-on-year in January.

The yield on the UK 10-year gilt advanced 3bps to 1.44% on Friday, as the UK GDP data surprised on the upside. Data showed that the British gross domestic product expanded 0.5% quarter-on-quarter in the 4Q, versus 0.4% expected by analysts.

As such, UK growth eased from 1.7% to 1.5% year-on-year, beating the consensus of analyst expectations of 1.4%.

A better-than-expected growth data spurred expectations that the Bank of England could raise the interest rates sooner rather than later.

However, the BoE Governor Mark Carney reminded that the speed of the UK interest rate rise hinges heavily on the Brexit negotiations, as he spoke in a panel at World Economic Forum in Davos.

The probability of a BoE interest rate hike stands has been calculated at around 65.3% for September, and at 82.3% for the end of 2018, based on futures market trades.

Though, the economic data and possible upward revisions to BoE forecasts for growth and inflation “would justify at least some shift in [BoE’s monetary] policy rhetoric”, according to Allan Monks, UK economist at JPMorgan.

JPMorgan upgraded its annual average UK GDP forecast by 0.2% to 2.0% in 2018. The growth forecast for 2019 was kept steady at 1.9%.

Barclays and ABN Amro Bank kept their UK growth forecast unchanged at 1.4% in 2018, with inflation seen at 2.6% and 2.3% respectively.

But economists at Bank of America Merrill Lynch were more pessimistic, as they pencilled the UK GDP growth at 1.0% with an inflation of 2.3% in 2018.

Both JPMorgan and BoFAML left their US growth forecasts unchanged at 2.5% and 2.7% respectively in 2018, and at 1.8% and 2.2% in 2019.

Released on Friday, the US GDP growth unexpectedly slowed to 2.6% quarter-on-quarter annualised in 4Q from 3.2% printed a month earlier. The analyst consensus was 3.0%.

On the other hand, the core PCE index surged from 1.3% to 1.9% quarter-on-quarter, fuelling expectations of a faster inflation in the US.

The US durable goods orders increased 2.9% in December versus 0.8% expected by analysts, according to data released by the Commerce Department on Friday. This is the largest increase in six months. Also, November data was revised higher to 1.7% from 1.3%.

Overall, US orders for durable goods increased by 5.7% during 2017, the highest in six years.

“Robust consumer spending and less inventory accumulation in the fourth quarter may also fuel production gains in coming months” according to economists at Bloomberg.

The US dollar pared losses against the group of G10 currencies at the start of the week.

The US 10-year yield advanced 2bps to 2.68%, while the 30-year yield gained 2bps to 2.93%.

The Federal Reserve (Fed) policy decision and jobs data are the key events in the US this week.

The FOMC is expected to maintain the status quo at this week’s meeting, however concerns about a rising US inflation will likely be mentioned at their latest policy statement.

Economists at Goldman Sachs expect “the FOMC to issue a generally upbeat post-meeting statement that includes an upgrade to the balance of risks and a slightly hawkish rewording of the inflation assessment.” They believe “the tone of the statement will be consistent with a hike at the March meeting, barring a sharp weakening in economic conditions.”

The probability of a March rate hike is currently assessed 94.5%.

Due on Friday, the consensus for US nonfarm payrolls is 180K in January, versus 148K printed a month earlier. The average hourly earnings may have improved to 2.6% year-on-year from 2.5% last month.